Liberty can lead to prosperity

Some "how to" books assume we can be superhuman, making perfect decisions using our whip-smart brains. Others, such as Nudge, are written for real people who are not necessarily rational all the time and who make mistakes as they muddle through life as best as they can.

An Economist and Financial Times Best Book of the Year, as well as a New York Times best-seller, Nudge is all about smartly but subtly pushing ourselves and others in the direction of making sensible choices.

Authors Richard Thaler and Cass Sunstein believe that we shouldn't feel panic about getting things wrong. Instead, we should let ourselves be nudged towards making the best or, at least, the most appropriate decisions.

One of the chief tenets of the book is that we all have the chance to be "choice architects", or people who have the responsibility for shaping and organising the contexts in which others make decisions.

In fact, a lot of us are already choice architects without even realising it. "If you are a parent, describing possible educational options to your son or daughter, you are a choice architect," the authors say. "If you are a salesperson, you are a choice architect (but you already knew this)."

The authors also suggest that small and apparently insignificant details can have major impacts on our behaviour. For many of us, knowing that whatever we do has an impact on someone or something, somewhere and at some point, can be as paralysing as it is empowering.

But, rather than send us into tailspins of panic about having to make perfect choices that will create the ideal ripple effect, the authors advise us to simply nudge things in the right direction. In other words, we need to exert our influence with a gentle prod to get people to do what we want, when and how we want it.

Nudging is how the authors express what they term their new movement - libertarian paternalism. This boils down to the belief that people should be free to do what they like and to opt out of undesirable arrangements.

The second half of the notion refers to the acceptance that libertarian paternalists should try to influence other people's behaviour in order to help make their lives longer, healthier and better. Thaler and Sunstein argue that this belief can be applied to all areas of our lives and society. Institutions in both the public and private sectors, for example, need to make self-conscious efforts to steer people's choices in directions that will improve their lives.

Opportunities to nudge in these fields include adopting an administrative "no fault" system for compensation for medical injuries. Already established in New Zealand, Denmark, Sweden and Finland, it has successfully reduced administrative burdens within the medical industry and has had a knock-on effect in terms of lowering the cost of health insurance and making health care more affordable.

Meanwhile, nudges can be put in place to encourage companies to do good. They can take the form of financial incentives that reward organisations for helping reduce air pollution, for example.

Liberal paternalists refrain from bulldozing people into making specific choices. Rather, they seek to provide starting points that mildly invite choices and outcomes.

The whole point about libertarian paternalism is that it is relatively weak, soft and non-intrusive and does not block, fence off or burden people's choices, say Thaler and Sunstein. Nudges from libertarian paternalists must not be dictatorial or prescriptive.

"If people want to smoke cigarettes, to eat a lot of candy, to choose an unsuitable health care plan or to fail to save for retirement, libertarian paternalists will not force them to do otherwise - or even make things hard for them," they say.

Libertarian paternalism does more than simply track or implement people's anticipated choices; it self-consciously attempts to move people in directions that will make their lives better.

To encourage people to eat healthily, rather than banning junk food outright in work or school canteens, libertarian paternalists will think about designing user-friendly environments, such as canteens that offer fruit at eye level.

Five insights

The workings of the brain are more than a little befuddling, write Richard Thaler and Cass Sunstein, the authors of Nudge. People can be ingenious at some tasks but clueless at others because one type of our thinking is intuitive and automatic, while the other is reflective and rational. If we can learn to rely on the latter, "our lives should be easier, better, and longer," the authors say.

Most of us realise that temptation exists and take steps to overcome it. However, we underestimate its effects, especially when it comes to problems with smoking, alcohol, exercise, excessive borrowing and insufficient savings. What we need to do, say Thaler and Sunstein, is learn how to exercise self-control.

Nudges can sometimes be bad or are simply unwelcome. But they should allow people to experiment. As the authors write: "Libertarian paternalists care about freedom: they are sceptical about approaches that prevent people from going their own way."

Giving feedback is one of the best ways to help people improve their performance. Thaler and Sunstein say that well-designed systems, such as digital cameras or laptops, tell people when they are doing well and when they are making mistakes. "An important type of feedback is a warning that things are going wrong, or, even more helpful, are about to go wrong," the authors write.

Some companies succeed because they attempt to move people in directions that will make their lives better. "Sometimes the choicearchitecture is highly visible, and consumers and employers are much pleased by it," the authors write. The iPod and the iPhone are good examples, because not only are they elegantly styled, but it is also easy for the user to get the devices to do what they want.